When the rule in Clayton’s case isn’t fair

The High Court at Auckland recently decided that application of the pari passu rule of distribution was fairer in the circumstances than the rule in Clayton’s case.

This case1 concerned an application by statutory managers of a number of entities for directions as to the method for distribution of realised assets.

300 or so investors had contributed a total of around $29 million to an investment scheme. The managers had accepted proofs of debt totalling around $14.4 million and held $4.9 million for distribution. On the question of tracing, only three of the investors could show that their funds had not been disbursed to other investors or otherwise withdrawn.

The court considered that the availability of “group tracing” was illogical and arbitrary. The investors’ intention was to participate in a global unit trust type of investment and the rule in Clayton’s case (basically, that the first amounts paid in are the first amounts paid out) would result in 13 investors being paid in full with the rest receiving only about 13 per cent of their investment.

The court decided that application of the rule in Clayton’s case would contradict the investors’ intention and concluded that the fairest method for the greatest number of investors was pari passu distribution.

Bell Gully Senior Associate Murray Tingey appeared for the applicants.

1 Re International Investment Unit Trust (Williams J, High Court, Auckland, CIV-2004-404-1868, 6 August 2004)

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